Private Equity Was Active in Franchising in 2014

In the last year, private equity continued to play an important role in franchising. Private equity offers a franchisor with a growing franchise system a promising pathway to rapid growth. An investment group can assist a franchise company strategically, tactically and with economies of scale.

Private equity sees value in the ongoing royalty stream of a franchise system. Franchised restaurants, hotels and retailers also typically have higher valuations than non-franchised businesses. This point was brought home to me at the Capital Roundtable “Private Equity & Franchising” event in New York City in October 2014. Using numbers from Capital IQ, Matt Kelly, of North Point Advisors in San Francisco, demonstrated that publicly traded restaurant, hotel and retail companies headquartered in the U.S. with a high percentage of franchised outlets tended to trade at higher valuations than those with just a few franchises. In the group of companies he identified, the multiple of enterprise value to EBITDA averaged 9.7 in the companies less than 30% franchised. Those 30% to 60% franchised had an average multiple of 12.2x. Those more than 60% franchised had an average multiple of 15.0x.

Here is a quick rundown of private equity acquisitions of franchise systems in 2014:

The Riverside Company acquired The Dwyer Group (Mr. Rooter, Rainbow International, Aire Serv, Glass Doctor, Mr. Appliance and others) from TZP Group in August 2014 after previously owning Dwyer from 2003 to 2010. TZP Group acquired Snap Fitness in January 2014.

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About: Tom Pitegoff

Tom Pitegoff is co-chair of the LeClairRyan franchise industry team. He is an internationally recognized leader in the franchise field. He drafts franchise agreements and disclosure documents, obtains state franchise registrations and provides ongoing franchise compliance counseling services. He represents foreign franchisors in their U.S. business and U.S. franchisors expanding abroad. View all posts by Tom Pitegoff →